Altria (MO -0.37%) and AT&T (T 1.02%) are two big names for many dividend investors, and it's no mystery why. While both stocks are trailing the S&P 500 over the past five years, they offer two of the highest dividend yields in the index.
While Altria sports a 9.3% yield at recent prices and AT&T is a few steps behind at 6.7%, I think there are three reasons it takes a back seat to AT&T.
1. AT&T has big trends on its side
Smoking in the U.S. has been declining for a while now. In 2005, around 21% of U.S. adults smoked tobacco; in 2021, that had dropped to 11.5%. For Altria, the largest tobacco company in the country, volume growth has felt the effect. In the third quarter, it reported its U.S. shipment volume declined by 11.6%.
Luckily for Altria, its pricing power has offset the volume drop over the years. The addictive nature of nicotine means people don't generally stop buying tobacco just because it went up in price. But at some point, the company will need a solution that isn't just raising prices.
I think it's hard to know when that will be with Altria consumers, but at some point, the company will need a viable income stream aside from its tobacco products. It's made attempts to adjust to the market by selling its own e-cigarettes, but most of those products have been discontinued with little to no success to show for it.
While Altria is experiencing volume issues, AT&T's customer growth is headed in the right direction. With the expansion of 5G coverage in the U.S. and the growth of fiber internet, AT&T has two core business segments that should experience good growth in the coming years. According to Ericsson -- which just struck a five-year, $14 billion deal with AT&T -- 5G will account for around 71.5% of the U.S. mobile market by 2029. Fiber is also only available to around 40% of Americans, so there's plenty of room to go.
2. AT&T has made debt reduction a priority
When AT&T decided to pursue its media and entertainment (M&E) ambitions, it took on a lot of debt to make it happen. In retrospect, I think AT&T and its investors would agree that its M&E moves turned out to be some of the worst in its history -- probably topped by its $85 billion acquisition of Time Warner, which closed in 2018.
Things have improved since it spun off WarnerMedia in early 2022 for $43 billion. In the first quarter of 2022, AT&T reported $180 billion in long-term debt. It has since knocked that total down to $138 billion (as of Sept. 30). That's still a lot of debt, but the company's free cash flow has given it enough room to be aggressive with its debt repayments over the coming years.
T Total Long Term Debt (Quarterly) data by YCharts
In the third quarter, AT&T reported $5.2 billion in free cash flow, up $1.4 billion year over year, and raised its full-year free-cash-flow guidance to $16.5 billion. This should help it achieve its goal of a net debt-to-adjusted EBITDA in the 2.5 range by 2025, down from 3.22 in the third quarter of 2022. Altria's was 2.1 at the end of the 2023 third quarter.
Altria has much less long-term debt than AT&T (just under $24 billion), but its operations rely heavily on it, as you can see in this comparison of the two companies' debt-to-assets ratios.
T Debt to Assets (Quarterly) data by YCharts
3. AT&T's valuation gives it a little more upside
AT&T seems to have turned the corner from its recent woes -- maybe not completely, but investors can see brighter days ahead with its recent performance.
Altria still seems to have many questions regarding how effective it can be in diversifying away from cigarettes and competing in segments like vaping. It also doesn't help that its failed Juul experiment, which cost it over $12 billion, brought on more skepticism.
At recent prices, AT&T is valued around 6 times trailing free cash flow, while Altria is just under 9, making the former more of a value, in my opinion. Add the fact that AT&T seems to have a clear plan, and I believe it has more long-term upside than Altria.
